New Louisiana Law Reduces Restrictions on Eroding-Limit Liability Policies

Newly signed amendments to Louisiana law will reduce and eliminate certain restrictions on liability policies whose limits erode by the insurer’s payment of defense costs.

Louisiana Act No. 675 JBE 2022 amends Louisiana’s regulation of the issuance of eroding-limit liability policies, under which policy limits are reduced by defense expenses. La. R.S. 22:1272 was enacted in 2021 to regulate the issuance of eroding-limit liability policies. It prohibited defense expenses from eroding the limits of liability policies issued by “authorized” insurers but with many exceptions, including the possibility of a waiver of the prohibition by the Commissioner of Insurance in certain circumstances.

Under the original legislation, the prohibition applied without exception to four types of insurance: personal lines, medical malpractice, commercial vehicle and commercial general liability. It excepted nine types of insurance from the prohibition:

1. 1. All Professional Liability other than malpractice
   2. Directors’ and Officers’ Liability
   3. Errors and Omissions Liability
   4. Pollution Liability
   5. Employment Practices
   6. Cyber Risk Liability
   7. Information Security and Privacy Liability
   8. Patent Defense or other intellectual property infringement liability
   9. Commercial liability coverages “sold in combination”

For any other types of insurance, the Commissioner was authorized to waive the prohibition upon the Commissioner’s consideration of the level of market competition, the nature and design of the product, the availability of insurance coverage, and “other relevant factors.” The original legislation prohibited certain expenses from eroding policy limits, including overhead costs, adjusting expenses, “or other expenses incurred by the insurer in the ordinary course of business.” It also prohibited defense expenses from exhausting the entire amount of policy limits and authorized the Commissioner to limit or define the amount of expenses that reduce policy limits.

The amended legislation maintains a general prohibition against defense cost-eroding policy limits, but with expanded exceptions and less authority for the Commissioner to restrict the defense cost-erosion of limits. The amendments allow the Commissioner to waive the eroding-limits prohibition on commercial vehicle and commercial general liability policies, leaving personal lines and medical malpractice coverage as the only liability insurance not entitled to a waiver under any circumstance.

The permissive waiver provision now requires the Commissioner to consider the customs of the industry and the interests of the particular insured. If there is a waiver of the eroding-limits prohibition, the insurer is no longer prohibited from exhausting policy limits by payment of defense expenses, and the Commissioner is no longer authorized to set or define the amount of expenses that reduce policy limits. La. R.S. 22:1272 still applies only to “authorized” insurers, not to non-admitted or surplus lines carriers.

The law, as amended, still restricts the defense expenses used to reduce liability limits to “reasonable attorney fees and expenses directly connected to the insurer’s defense of a specific liability claim on behalf of an insured and any other litigation expenses directly arising from the defense of a specific liability claim.” It still prohibits an insurer from reducing policy limits with overhead costs, unallocated loss adjustment expenses, and other unallocated expenses incurred by the insurer in the ordinary course of business. It also carries over the requirement from the original legislation that an eroding-limits policy (subject to certain exceptions) must include a separate notice or inclusion on the declarations page that defense expenses erode policy limits.

Please contact Doug Kleeman or any member of Phelps’ Insurance team if you have questions or need advice or guidance.